Treasury considerations for corporate reporting

IFRS 18 introduces a prescribed structure for the statement of profit or loss, with items classified into five categories: operating, investing, financing, income taxes, and discontinued operations. For most corporate entities, the main focus will be on the first three.

This matters because treasury-related transactions will no longer sit within a more flexible presentation framework. Instead, entities will need to apply clearer classification principles, potentially with more granular outcomes than under current practice.

Consideration of main business activities

This article explores the considerations for corporate entities that do not have a main business activity of providing financing to customers or investing in assets, as defined in IFRS 18. Additional considerations apply for entities such as banks or insurers that have one or both of these main business activities. A treasury entity preparing individual financial statements applying IFRS 18 might conclude that it provides financing to customers as a main business activity. 

Importantly, classification of certain transactions will depend on the entity’s main business activities as defined in IFRS 18, and that assessment is made at the reporting entity level. As a result, the conclusion reached in a subsidiary’s individual financial statements might differ from the conclusion reached at group level, leading to reclassification on consolidation. For diversified groups, this assessment may involve judgement, particularly where financing or investing activities are sizeable but not obviously central to their group business model.

IFRS 18 provides examples of evidence that could indicate the main business activities of an entity. This assessment is based on facts, and not purely an assertion for accounting purposes.

One of the most significant changes for treasury is the introduction of a new concept: liabilities arising from transactions that involve only the raising of finance.

In broad terms, a transaction involves only the raising of finance where the entity receives cash and later repays it in cash or its own equity instruments, refinances an existing liability, or issues or repurchases its own equity instruments for cash. In a corporate setting, this will typically include conventional external borrowings and similar funding arrangements.

By contrast, liabilities such as trade payables, lease liabilities and commodity loans are not regarded as arising from transactions that involve only the raising of finance. They are treated as other liabilities.

‘Financing liabilities’ compared to financial liabilities 

liabilities arising from ‘transactions that involve only the raising of finance’, as described by IFRS 18, consist of only a subset of financial liabilities as defined by IAS 32. This means that some income and expenses from liabilities within the scope of IFRS 9 may still be classified in the operating category.

Profit or loss compared to cash flow statement  

The IFRS 18 classification of income and expenses in the statement of profit or loss might not align with how the related cash flows are presented in the cash flow statement, applying IAS 7.  

A lease is a useful example of how this can produce outcomes that are technically consistent, but less intuitive at first glance. Under IAS 7, lease-related cash outflows are generally presented as financing cash flows. Under IFRS 18, however, depreciation of the right-of-use asset is presented in operating, while interest on the lease liability is presented in financing. This is a reminder that the profit or loss categories in IFRS 18 are not intended to mirror cash flow presentation.

IFRS 18 also introduces more specific requirements for the classification of foreign exchange differences recognised in profit or loss under IAS 21.

The general principle is that FX differences should be presented in the same category as the income and expenses arising from the item that gave rise to them, unless doing so would involve undue cost or effort. In practice, this means FX differences on trade receivables will generally be presented in operating, while FX differences on foreign currency borrowings that arise from financing-only transactions will generally be presented in financing (for entities whose main business activities do not involve the provision of financing to customers).

For some entities, this could be a significant change. Today, it is not uncommon to present FX gains and losses in a single line item, often within operating profit. IFRS 18 may instead require those amounts to be spread across operating, investing, and financing.

This may be particularly relevant where treasury activities are centralised, but the underlying exposures relate to different parts of the business. The result may be a more faithful classification under the standard, but also a less familiar presentation for users. 

The classification of gains and losses on derivatives and designated hedging instruments is another area where IFRS 18 introduces greater discipline.

The key principle is that classification depends on why the instrument is held. Where a derivative or other financial instrument is used to manage an identified risk, such as FX, interest rate or commodity price risk, gains and losses are generally presented in the same category as the income and expenses affected by that risk. This principle applies both to formally designated hedging instruments and, with some differences, to instruments used economically to manage risk without hedge accounting designation.

However, there are practical limits. If applying that principle would require the entity to gross up gains and losses, or would involve undue cost or effort, IFRS 18 allows the gains and losses to be presented in operating instead.

Where derivatives are not used to manage identified risks, the classification is more straightforward: if the derivative relates to a transaction that involves only the raising of finance, gains, and losses are presented in financing; otherwise, they are presented in operating.

Practical observation

IFRS® Accounting Standards do not currently specify where in the statement of profit or loss to present derivative gains and losses, resulting in diverse practices. On transition to IFRS 18, some entities may need to change their accounting policies. 

IFRS 18 does not prescribe the line item in profit or loss in which to present derivative gains and losses, nor does it override the requirements in other standards. It does however prescribe the category of profit or loss in which to classify such gains and losses. In addition, an entity will need to consider the revised principles for aggregation and disaggregation to determine the appropriate line item to present these gains and losses.

Although IFRS 18 does not prescribe specific line items for FX movements or derivative results, it does prescribe the category in which they should be presented. That means entities will need to reconsider not only classification, but also aggregation and disaggregation in the statement of profit or loss.

For some functions in charge of treasury activities, implementation may require more than technical accounting analysis. Systems, chart of accounts design, management reporting, hedge documentation, and consolidation processes may all need attention – particularly where current reporting is built around centralised treasury activity and broad presentation line items.

For treasury transactions, IFRS 18 is not just a presentational update. It creates a more structured framework for reporting the effects of financing, FX, and risk management activities, and in doing so may change how those activities are presented and interpreted.

The economics may be unchanged. But under IFRS 18, the reported story could look meaningfully different.